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Developments in Securities Law - April 2012

On April 5, 2012, the Jumpstart Our Business Startups Act (the JOBS Act) was signed into law. While many aspects of the JOBS Act remain subject to further SEC rulemaking, including relaxation of restrictions on general solicitation and the controversial crowdfunding measures (see our prior summary of these measures here), certain portions of the JOBS Act—namely provisions intended to spur public offerings of emerging growth companies (EGCs), a newly created class of issuers, and provisions increasing the number of record holders that an issuer may have before registration is required became effective when the JOBS Act was signed into law. In the two weeks since the passing of the JOBS Act, the SEC has published three sets of Frequently Asked Questions (FAQs) to provide initial guidance on the implementation and application of the law. These FAQs are not rules, regulations or statements of the SEC. Instead, they are merely the SEC’s current guidance on the implementation and application of the JOBS Act, based on its current understanding of the JOBS Act in light of its existing rules, regulations and procedures.

On April 10, 2012, the SEC issued FAQs related to a number of ambiguities regarding the confidential submission process for EGCs described in the JOBS Act. The JOBS Act was designed to help companies go public, raise capital privately, and remain private longer. Among other things, it amends Section 6 of the Securities Act of 1933 (Securities Act) by permitting an EGC, prior to its initial public offering, to confidentially submit to the SEC a draft registration statement for review, provided that the initial confidential registration statement and all amendments thereto are publicly filed with the SEC not later than 21 days before the date on which the issuer conducts a road show in connection with the public offering. The SEC’s FAQs on this subject are available here.

On April 11, 2012, the SEC issued FAQs related to the JOBS Act’s amendment of provisions of the Securities Exchange Act of 1934 (Exchange Act) relating to registration and deregistration requirements. For issuers other than bank holding companies, the record holder threshold requiring Exchange Act registration was increased from 500 to either 2,000 persons total or 500 persons who are not accredited investors. For bank holding companies, the record holder threshold requiring registration was increased from 500 to 2,000, and the threshold for suspension of reporting and deregistration was increased from 300 to 1,200. Each of these thresholds now excludes persons who received the securities pursuant to an employee compensation plan in transactions exempt from registration under Section 5 of the Securities Act and, once regulations have been adopted, will exclude persons to whom the securities were issued through exempt crowdfunding activity. The FAQs (available here) clarify a number of issues, including the following:

Bank holding companies with fewer than 1,200 holders on record may submit a Form 15 to deregister. Since this section of the JOBS Act does not require rule-making, it is effective immediately. Because Form 15 has not yet been amended, the SEC staff is requesting that deregistering bank holding companies include a footnote stating that it is relying on new Section 12(g)(4) of the Exchange Act. Once Form 15 has been filed, the bank holding company will continue to be required to make Exchange Act filings for 90 days after submission.

While the JOBS Act amended Section 12 of the Exchange Act to lower these thresholds, it did not amend Section 15 of the Exchange Act, which may require continued reporting, even if a company is not registered. Thus, if a bank holding company deregisters but has had a registration statement become effective during this fiscal year, it would still need to make filings through the end of the year. The SEC staff has advised that if such an issuer has not actually issued securities under such a registration statement that has been filed, the issuer may seek no-action relief to suspend reporting obligations earlier.

Individuals who received securities pursuant to employee compensation plans in exempt transactions are not counted towards the thresholds, whether or not those individuals continue to be employees of the issuer. The SEC staff has provided oral guidance that transferees of individuals who received securities pursuant to such an exemption do, however, continue to be counted against these limits.

On April 16, 2012, the SEC issued FAQs addressing questions of general applicability under Title I of the JOBS Act. Title I provides scaled disclosure provisions for EGCs, including, among other things, requiring only two years of audited financial statements in the Securities Act registration statement for an initial public offering of common equity securities, permitting EGCs to use the smaller reporting company version of Item 402 of Regulation S-K, and exempting EGCs from any requirement to file Sarbanes-Oxley Act Section 404(b) auditor attestations of internal control over financial reporting. Title I also enables EGCs to use test-the-waters communications with Qualified Institutional Buyers or "QIBs" and institutional accredited investors, and liberalizes the use of research reports on EGCs. The SEC’s FAQs on this subject are available here.

Updated Financial Reporting Manual

In addition, on April 13, 2012, the SEC updated its Financial Reporting Manual for issues related to scaled disclosure for smaller reporting companies, filing requirements for reverse acquisitions, the treatment of related businesses in significance testing, revisions pursuant to ASU 2011-12, as well as other changes. Issuers should be careful to ensure that internal and external accounting advisors are aware of the recent updates and are following the current manual.

SEC Seeks Input on JOBS Act Ahead Of Rulemaking

On April 11, 2012, the SEC announced that it will begin accepting comments from the public as the agency sets to promulgate further rules required under the JOBS Act.

The SEC is generally required by law to establish a public comment period at the time it proposes rules or rule amendments. However, similar to the SEC’s action in connection with the Dodd-Frank Act, the public will have an opportunity prior to the official proposal of new rules to voice its views. The public will also be able to see what others are saying to the agency about these issues. To facilitate public comment, the SEC is providing a series of links on its website organized by sections of the JOBS Act.

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